Starting up a limited company is a big step for you and your business. It's easy to get carried away in the excitement and miss some of the things you are required to do to be compliant with all the company and tax laws.
I’ve previously written about the compliance requirements and how to take money out of a company, which I would recommend reading if you haven’t already done so.
Working from Home Allowance
If your employment requires you to work from home, then you can claim an allowance of £6 per week for doing so. This applies to company directors who are employees of their own company. You can either claim this as a deductible expense of employment on your tax return, or get your company to pay this to you as income, which isn’t taxable. The latter is probably the best of the two approaches as it also allows the company to save a small amount of tax.
Trivial Benefits
A limited company is allowed to buy things for their staff – called trivial benefits. These purchases can be claimed as a tax-deductible expense, provided certain terms are met. The trivial benefit must not be:
- Worth over £50.
- Cash, or a voucher.
- A reward, or in the terms of the employees contract.
For directors of small companies, you cannot receive more than £300 of trivial benefits in a year. The rules around this are on the government website.
Director’s Loan Accounts
Directors who are sole shareholders in a company often take money out as and when they require it for personal expenses. This is allowable, and classed as a loan, unless you declare it as dividends. Often, dividends are declared at the end of the year for the amount taken out of the company.
Directors can only declare dividends up to the amount of profits within the company, after taxes are calculated. You can therefore get into the situation where cash is available to take out of the company, but the year-end accounts haven’t been calculated. As a result, the funds within company might yet be required to go towards the tax bill.
As a director, if you take out more than can legally be declared as dividends, some or all of it might need to remain as a director’s loan.
This can become a problem. If the director’s loan account isn’t cleared by the time the tax return is due (9 months after the year end), there is a hefty charge on the outstanding amount. This charge can be reclaimed, but it is a lengthy process and much better avoided if possible.
The loan can be cleared either by putting funds back into the company or legally declaring dividends when more income has been received. It is best to check with an accountant how to proceed in this matter.
If a company has more than one shareholder, dividends need to be split in proportion to their shareholding. This adds complexity. In this instance, I would recommend not taking money as and when it is needed. Instead, schedule regular declarations of dividends.
Travel and Subsistence
It is possible to claim your travel costs when working for a limited company, provided certain conditions are met. You cannot claim travel for a permanent place of work – so if you have an office, you can’t claim for travel there and back. You can, however, claim for travel expenses over and above that, for example, if you need to visit a client on site.
It is possible to have a car owned by your company. However, unless it is used solely for company business with no personal usage, this comes with a tax charge on you as an individual.
The mileage allowance on a personal car allows for the cost of insurance, repairs, and tax as well as fuel. I recommend claiming mileage, over just the cost of fuel, and keeping a log of all your elligible journeys to pass to your accountant at year-end.
Subsistence is the cost of food and drinks whilst on an eligible work trip – so again, you cannot claim for these when going to a permanent place of work. But if you're travelling somewhere outside of the norm, then reasonable expenses are allowable. A cafe lunch is much more reasonable than a meal at the Savoy, for example, and generally you cannot claim for any alcohol.
Record Keeping
One thing that all company directors need to get their heads around is that you must keep all your financial records. Ideally, link any receipts and invoices to your accounting software so they can be found in the event of a query. It is a legal requirement to keep records for six years from the end of the related company financial year. The potential penalty for inadequate records is £3,000.
On top of this, if you are VAT registered, you are required to be able to provide evidence for every invoice for purchases on which you are reclaiming VAT. It is not possible to reclaim VAT without this evidence.
Finally
It can be a bit daunting at first to work out exactly how to keep on top of your record keeping. However, using software and finding a good accountant will help ensure you are compliant with all the regulations.
